NOT FOR PUBLICATION UNTIL RELEASED BY
THE HOUSE ARMED SERVICES COMMITTEE
SUBCOMMITTEE ON PROJECTION FORCES
STATEMENT OF
C. MICHAEL PETTERS
CORPORATE VICE PRESIDENT AND PRESIDENT,
NORTHROP GRUMMAN NEWPORT NEWS
BEFORE THE
SUBCOMMITTEE ON PROJECTION FORCES
OF THE
HOUSE ARMED SERVICES COMMITTEE
ON THE
US NAVY’S PROJECTED SUBMARINE FORCE STRUCTURE
MARCH 28, 2006
NOT FOR PUBLICATION UNTIL RELEASED BY
THE HOUSE ARMED SERVICES COMMITTEE
SUBCOMMITTEE ON PROJECTION FORCES
Chairman Bartlett, Ranking Member Taylor, distinguished members of the Projection
Forces Subcommittee, thank you for this opportunity to appear before you to discuss the
Navy’s projected submarine force structure and implications for submarine construction.
Introduction
I am privileged to be one of more than 18,000 shipbuilders at Northrop Grumman
Newport News. Newport News has been delivering great ships since 1890 with its
production of Hull Number 1, a 90-foot tugboat named Dorothy. Our relationship with
the Navy dates back to 1893 with a contract for three gunboats. In our 116 year history,
Newport News has built for the Navy 29 aircraft carriers, 55 submarines, 31 destroyers,
31 landing ships, 24 cruisers and 14 battleships, along with hundreds of other ships. Ours
is a heritage of partnership with the Navy and service to the country. It is a history we
are proud of and will work hard to sustain for as long as our Navy needs ships to defend
the nation. Since 2001 Newport News has been an operating sector of Northrop
Grumman Corporation.
Northrop Grumman Newport News is the nation’s sole designer, builder and refueler of
nuclear-powered aircraft carriers. Using the most modern design methods in the industry,
Newport News is currently designing CVN 78, the first of the next generation of CVN 21
class aircraft carriers. The CVN 21 design team, which includes Electric Boat in a key
role, is, in my view and the view of many, the best warship design team in the world
today with the best people, the best tools and the best processes to be found anywhere.
Advanced construction of some modules of this new carrier has begun with the bulk of
construction to begin in 2008 with award of a construction contract. This design effort is
taking place at the same time that the last of the Nimitz-class carriers is under
construction. CVN 77, George H. W. Bush, will be christened this fall and is scheduled
for delivery to the fleet late in 2008. We are also currently engaged in the forty-month
mid-life refueling, overhaul, and modernization of our third Nimitz-class carrier, the CVN
70, USS Carl Vinson.
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Newport News is one of only two companies capable of designing and building nuclearpowered submarines. General Dynamics Electric Boat is the other nuclear submarine
design and construction company and, since 1997, we have teamed together for the
construction of the Virginia-class submarine. I will focus on our teaming arrangement
and the Virginia-class program shortly.
In addition to submarine design and construction and aircraft carrier design, construction
and mid-life refueling, Newport News has an active fleet maintenance program with
work performed at Newport News and other locations on submarines, aircraft carriers,
and a variety of other naval vessels. Newport News also does repair work on commercial
vessels using one of several dry docks at our 550 acre facility in Hampton Roads.
The men and women of Newport News who design, manufacture, and maintain nuclear
powered submarines and aircraft carriers represent what is great about American
industry. Our employees are skilled in the craft of shipbuilding and possess the tools and
knowledge required for the many highly specialized requirements of nuclear ship
construction and maintenance. Many of our shipbuilders come from families where for
the past four or five generations at least one family member has worked at the shipyard.
It is not uncommon today to find multiple generations of a family working side by side
on a ship or in our shops. Each year we recognize shipbuilders who have reached their
fortieth year of shipbuilding by designating them “Master Shipbuilders.” There are more
than 400 Master Shipbuilders at work today at Newport News and many of them learned
their craft through the shipyard’s Apprentice School – a nationally recognized center of
excellence for training new shipbuilders.
All of us at Newport News know and respect our heritage. We understand that the ships
we deliver to the Navy today will carry the sons and daughters of America into harm’s
way in defense of freedom tomorrow. This is a responsibility that we all take very
seriously and it inspires us to produce the best ships in the world for the finest Navy in
the world.
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You have asked me to focus my remarks today on the nuclear submarine program. There
are four key points I would like to make.
First, the nuclear submarine production industry in America is alive today thanks to the
wisdom of the Congress and the investment that the American people have made in this
industry.
Second, the team of Northrop Grumman Newport News and General Dynamics Electric
Boat is strong and functioning well. Electric Boat delivered the USS Virginia, the first of
the new class of submarines, in 2004 and the Navy has reported that it is performing
superbly. In fact, the success of the ship and crew in its Quick Reaction Assessment in
2005 enabled USS Virginia to conduct operations prior to completion of Developmental
and Operational testing. Newport News is on the verge of delivering its first of this class,
Texas, this spring after a ten-year hiatus from submarine construction.
Third, I have spoken in other forums about the needs of the shipbuilding industry for
stability if we are to successfully deliver ships to the Navy at a cost that the nation can
afford. With the delivery by the Navy of a 30-year shipbuilding plan in February 2006,
the industry can see that stability may be within reach. Continued commitment will be
needed to ensure this plan is fully funded.
Fourth, stability is critical to the shipbuilding industry, but volume is essential if costs are
ever going to be reduced in a meaningful way. In the case of Virginia-class submarines,
the sooner we reach production of two submarines per year, the sooner we will see
meaningful reductions in the cost of these submarines.
The Submarine Industry Today
Before addressing the state of our industry, a bit of submarine history may be useful to
provide context for where we are today. In the mid-1980’s the Navy requested and
Congress funded work to begin on the Seawolf-class of nuclear attack submarines. The
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Navy had intended that the class could be as large as 29 of these stealthy and
technologically advanced submarines to replace the Los Angeles-class submarines as they
reached the end of their service lives. Newport News was designated the lead design
yard for Seawolf and both Newport News and Electric Boat prepared for work on this
class by investing in facilities, training employees, and making preparations for efficient
production. Newport News alone invested about $900 million in then year dollars from
1981 to 1990 modernizing and adding new facilities to handle the volume of work
anticipated and the unique aspects of submarine construction. The initial contracts were
awarded to Electric Boat and construction began in 1989. A short time later, the plan was
changed to call for production of only two submarines. After President Clinton was
elected in 1992, a third Seawolf was restored to the plan and this also was awarded to
Electric Boat.
Despite the investments Newport News had made for submarine production and the
critical skills that everyone acknowledged existed in our yard, we were essentially told
we were no longer needed to produce submarines. As the follow-on Virginia-class
submarine was on the verge of being funded, Newport News and Electric Boat made the
case to the Congress that it was vital to maintain skills and facilities at both Newport
News and Electric Boat and that the best way to maintain the submarine industrial base at
both yards was for Newport News and Electric Boat to share submarine construction for
the Virginia-class through a teaming arrangement. After careful deliberation, the
Congress agreed and in the FY 1998 National Defense Authorization Act, the first four
Virginia-class submarines were authorized to be procured under a teaming arrangement
which Electric Boat and Newport News had proposed in December 1996. The two
companies jointly established the contractual and work procedures they would follow to
build submarines together with Electric Boat as the prime contractor and Newport News
the subcontractor. The teaming agreement was formally signed by both companies in
February 1997. Subsequent Authorization Acts have continued the requirement to
procure this class of submarines from the Electric Boat – Newport News team.
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Fleet operators and strategists often speak of submarines as being asymmetric assets for
the Navy. History has shown how one submarine operating or believed to be operating in
an area can keep an entire fleet in port. The nation and the Congress have decided to
invest in these asymmetric platforms and they have done so by ensuring that the United
States has an unmatched industrial capability to produce technologically superior
submarines. At Newport News we believe that the investment the country made carried
with it a responsibility for us to be a good partner with Electric Boat and the Navy, to
reconstitute our submarine workforce efficiently, to optimize our submarine construction
facilities and processes for the most economical means of producing the Virginia-class
and to actively work at delivering successive submarines at lower cost. We are fulfilling
our responsibilities and we will continue to do so. Let me give just a few examples.
Capital Investment
In the past three years, Northrop Grumman shareholders have invested over $250 million
of capital to modernize critical equipment and build new facilities to improve the
efficiency of our operations and reduce costs on Navy programs. Some of our
investments are in machinery and specialized shops which will benefit all Navy
programs. Others are specific to the submarine program where the Virginia-class
contract has provided additional incentives for us to do so. These incentives require an
up-front use of shipyard capital with the possibility of earning an incentive, but only if
the improvement actually delivers the savings that we estimated. We are focused on
establishing multi-use, multi-purpose facilities that increase our flexibility to do work
where it is best for our employees and where the work can be done most efficiently.
Thus, for example, we have invested in covered modular assembly and modular outfitting
facilities because we know that weather affects productivity and productivity drives labor
costs. In the next five years we will continue our capital investments in our future and
future Navy ships with another $320 million. I believe this is a clear indication of our
commitment to the Navy to reduce costs on their programs in every way that we can.
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Investments in People
Equally as important, though far less visible than facility modernization, are the
investments that we are making in our people at Newport News. We have realized for a
number of years that we are challenged by shifts in demographics that are having a
profound impact on our ability to perform. Given the changes that we have experienced
in shipbuilding plans and programs in past years, our work force is now made up of a
large group of new employees, with five years or less work experience, and a significant
group of more experienced employees, with 25 or more years in the shipyard, who are
now approaching retirement eligibility. This confronts us with two challenges – to
accelerate the development of those with under five years experience, what we call our
“green labor” issue, and to ensure that more experienced employees transfer their
knowledge and lessons learned to newer ones who will ultimately have to replace them.
We are addressing these challenges by investing in our people. First, we are maximizing
the value of our flagship Apprentice School where we are training and developing new
generations of shipyard leaders. We review and upgrade the curriculum to keep pace
with continuously evolving and increasingly complex production processes. Because of
our strong relationships with local community colleges, we project that in the near future
almost half of our graduates will also receive an associate’s degree upon graduation from
The Apprentice School. As the science of shipbuilding becomes even more complex and
the industry and marketplace in which we operate changes, we anticipate that future
graduates may require a bachelor’s degree. Second, we have developed specialized
training courses aimed at new employees to improve their skills and to remedy
deficiencies of their non-shipyard educational experiences. Our goal is to reduce the time
required for an employee to become “proficient” from five years to three. To date we
have revised or developed over 50 courses aimed at this critical segment of our work
force with an equal number still in process. Third, we have strengthened and formalized
on-the-job training. While this adds new requirements to front line supervisors, we
recognize the need to provide a more structured degree of training under real world
conditions. Fourth, we are working with partners in the community to provide
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educational opportunities beyond the shipyard gates. We have strong relationships with
high schools and community colleges in Hampton Roads and work closely on the
development and delivery of specialized technical training that will benefit our
workforce.
Beyond technical and skills training, we have made a commitment to ensure that
leadership is one of our core competencies. In recent years we developed a case-study
based leadership course for first line supervisors – foremen, shop supervisors,
engineering supervisors – to strengthen their leadership skills. We also are engaged in an
intensive effort at the deck plate level, with the submarine program as our pilot, to coach
front line leaders in ways to better manage schedules, workloads and costs. This program
is helping us address the impact of green labor in construction and we are encouraged by
what we have seen to date. The combination of strong leadership and technical
proficiency has helped our front line leaders better manage and train new employees and
oversee the transfer of knowledge from more seasoned employees.
At Newport News, developing our people is not just a slogan – it is what we do every
day. It is my strong belief that when well trained and motivated people have efficient
processes with which to do their work, the results are strong performance.
Investments in Process Improvements
Without efficient processes, good people become frustrated and may perform in ways
that are contrary to the good performance we expect on all of our programs. Realizing
this, my first act as sector president in November 2004 was to appoint a vice president of
Process Excellence and charge her with guiding the shipbuilding programs as they
reviewed their processes, identifying those that are not as efficient as they need to be, and
taking steps to improve them. To date we have performed critical value stream mapping
of many of our cross-program functions such as steel delivery, pipe flows and planning.
From these maps, we identified areas of potential improvement and have chartered teams
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of experts under the leadership of sector vice presidents to identify the steps needed to
improve the efficiency of these processes.
In the submarine program we are also focusing on deck plate producibility
improvements. We know that the best solutions to problems come from people who
know the issues the best – our deck plate leaders and employees. This grass roots effort
has identified a large number of improvements that could be made to reduce cost and
improve efficiency. As these ideas surface, they are quickly evaluated and authorized for
implementation. To date at both Electric Boat and Newport News, we have implemented
initiatives that will save over $55 million in labor and over $30 million in material across
the class of ships. This program will continue with ideas being freely and rapidly shared
between the two teaming partners.
Other process improvements are being made by identifying new manufacturing
techniques and products that can reduce the costs of producing submarines. These
techniques often come from our aircraft carrier construction or refueling programs or
from work we are doing in fleet maintenance. Examples include new techniques of
fusion splicing for fiber optics, automatic alignment of complex equipment, and vendorsupplied pre-mixed and pre-measured glue and paint.
Our work in this area is far from complete, but we are investing a considerable amount of
time and energy at every level of the sector – from the senior staff to deck plate
employees – to root out waste and inefficiency and to maintain efficient, effective
processes that deliver value at minimal cost.
Delivering Results
The initiatives we have undertaken in these areas are critical to the long-term success of
Newport News. We have seen indications that our efforts have taken hold and our
investments are beginning to pay dividends. In 2005, for example, Newport News
redelivered four ships to the Navy. Each of these was redelivered under budget.
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Favorable performance of our work on the Docking Planned Incremental Availability
(DPIA) on CVN 73, USS George Washington, will translate into a return of about $30
million to the Navy. This is money the fleet can use to fund other critical needs. The
CVN 69, USS Dwight D. Eisenhower, Refueling Complex Overhaul (RCOH), was cited
by the former Assistant Secretary of the Navy John Young as a “win-win” for incentivebased Navy contracts. In the CVN 65, USS Enterprise, Extended Selected Restricted
Availability (ESRA), we accomplished enormous amounts of emergent work on this 40year old carrier and completed our work under budget. Finally, the SSN 709, USS
Hyman G. Rickover, Interim Dry Docking (IDD) was a firm fixed price contract where
planning costs were reduced some twenty percent from other IDDs and we completed our
work under budget.
In each of these four redeliveries, the Navy was pleased with Newport News’ work
performance, performance to budget and establishment of strong partnerships with the
crew and overseeing Navy agencies. I will speak to the results being achieved in the
submarine program shortly, but will say that with the successful delivery of Texas, the
wisdom of the Congress in returning Newport News to submarine production will be
confirmed.
The Electric Boat-Newport News Team
After nearly ten years of teaming with Electric Boat, I am proud to tell you that our team
is strong. We share a common vision of what we need to do to make this program a
success for the Navy, the nation and our corporations. Between us we have the finest
nuclear shipbuilders in the world who are working well together.
The teaming agreement established Electric Boat and Newport News as equal members
of the team. This principle of equality is carried forward in how the submarines are
constructed. To achieve equality in the work split and to play to the strengths of the two
shipbuilders, the teaming agreement assigns certain of the modules that make up a
submarine to a particular team member to build for all ships. To retain critical nuclear
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construction skills, the construction of the reactor compartment and all of the work
leading up to final ship acceptance – final assembly, testing, and outfitting – are
alternated between the team members with Electric Boat performing these functions for
even numbered ships and Newport News for odd numbered ships. By working on the
same modules from ship to ship, employees in each yard develop specialized expertise on
those modules, transfer lessons learned from one module to the next, and, ultimately, are
able to manufacture and outfit those modules for fewer man-hours. Similar learning will
occur in the assembly, test, outfitting and all other activities leading up to final
acceptance as each yard performs these functions more than once.
Just as the work sharing arrangement in the teaming agreement fosters efficiency in
construction, the teaming agreement establishes a fee sharing formula that has a similar
effect. Rather than each team member having a separate profit formula based solely upon
its performance, the team shares only one profit which is paid to the team based upon the
team’s performance under the prime construction contracts. In each of the two
subcontracts awarded to date for Blocks 1 and 2, the team has shared this profit pool
essentially equally. This aspect of the teaming agreement has proven to be the most farreaching of all and clearly shows the foresight of the agreement’s crafters in the shipyards
and Congress’s wisdom in sanctioning the team agreement in the various statutes that
have funded the ships. By sharing only a single profit pool, the necessary incentives are
in place for employees at both yards to work together effectively to reduce costs, to
collaboratively and quickly resolve issues which arise, and to share ideas on ways to
accomplish work more efficiently. Sharing a single profit pool equally makes the success
of each yard dependent on the success of the entire team. Problems that develop at one
yard, if not resolved quickly, will degrade the performance of both team members. The
result of all this is that there has been an active exchange of people, best practices,
lessons learned and other information between the two yards – all to the benefit of the
program.
Before the start of construction, the team developed more detailed plans concerning the
general module assignments set forth in the teaming agreement. As the team has gained
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construction experience, we have recognized that within the broad outline of the module
assignments established in the teaming agreement we could streamline the construction
process by being able to shift some work between the two yards when it would fit better
in a different phase of construction. For example, one yard might be scheduled to install
a component in a module before it becomes a larger module at the other shipyard. Deck
plate employees, however, might see that it would be more efficient and cheaper to install
the component after the larger module had been formed. The teaming agreement
provides both yards flexibility to make these deck plate initiated changes rapidly and
efficiently. As a result, to date over a million man-hours of work have shifted between
Newport News and Electric Boat with the benefits going to the program.
Our team has now seen the delivery of the first of this class, USS Virginia, by Electric
Boat, and shortly will see the first Newport News-delivered submarine, Texas. These are
noteworthy achievements for both yards and for the team as a whole. No one should
underestimate the difficulty of successfully delivering the first of a class of any ship.
There are challenges that arise that no one could have anticipated and the timeline to
delivery is unforgiving. But we are meeting those challenges and soon the fleet will have
the two finest submarines in the world.
Just how successful this team has been can be seen by comparing our performance today
on the delivery of lead ships with other classes of submarines. Electric Boat delivered
USS Virginia within four months of a schedule established twelve years earlier in 1993.
This was its first lead ship delivery in eight years. Texas will be delivered by Newport
News within eleven months of the original schedule. This will be our first lead ship
delivery since USS Los Angeles in 1976, our first submarine delivery in ten years, and
comes only after reconstituting our submarine workforce. In contrast, the lead Seawolfclass submarine completed 25 months beyond original schedule; the lead Los Angelesclass 26 months beyond original schedule; and the lead Ohio-class thirty months beyond
schedule.
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The team currently has contracts to build the first ten submarines of the Virginia-class in
two blocks as shown in Figure 1.
100%
100%
95%
Total Percent Complete (EB and NN)
EB Delivery
NN Delivery
80%
80%
69%
60%
52%
39%
40%
20%
16%
10%
5%
5%
0%
SSN 774
Virginia
SSN 775
Texas
SSN 776
Hawaii
SSN 777
North Carolina
SSN 778
New Hampshire
SSN 779
New Mexico
SSN 780
TBD
SSN 781
TBD
SSN 782
TBD
SSN 783
TBD
EB Delivery
Oct-04
NN Delivery
May-06
EB Delivery
Mar-07
NN Delivery
Jun-08
EB Delivery
Feb-09
NN Delivery
Apr-10
EB Delivery
Apr-11
NN Delivery
Apr-12
EB Delivery
Apr-13
NN Delivery
Apr-14
Block 1
Block 2
Block 1
Block 1
Block 1
PSA underway
at EB
Final testing
underway
Pressure hull
complete
Pressure hull
All NN modules
complete Jul-06 to EB by Jan-07
Block 2
Block 2
Block 2
Block 2
Block 2
Working
modules
Working
modules
Working
modules
Material
procurement
Material
procurement
Figure 1: Virginia-Class Submarines Blocks 1 and 2
As can be seen, there is considerable activity throughout the program and good progress
is being made. Three vessels have their pressure hulls complete with the fourth due to
complete this summer. Both shipyards are working on modules for four of the six ships
in Block 2 and Newport News will complete and ship its final modules to Electric Boat
on ship 5, New Hampshire, early next year. Closing pressure hulls and bending steel are
important, but so too is making progress on reducing costs and this team is achieving
precisely that.
It has become apparent to me as the program has progressed that performance in each
block of ships is reflective of the phase of reconstitution taking place in the submarine
construction industry. Block 1 ships, ships one through four, started their construction as
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the shipyards were reconstituting their submarine work forces. In the case of Newport
News, this meant hiring some new employees and moving others from our carrier
programs and certifying or recertifying them in SUBSAFE and other submarine-specific
procedures. Specialized facilities were coming on line and equipment modernization
unique to submarine production was being accomplished. This period marked the return
of Newport News to the submarine construction business and, as a result, some
inefficiencies existed.
In spite of the many challenges presented by reconstitution at Newport News, a June
2005 assessment conducted by the Independent Review Team of the Assistant Secretary
of the Navy (Research, Development and Acquisition) concluded that, barring
unexpected technical problems, the labor hours and dollar cost of Newport News’ lead
ship, Texas, at final acceptance should be approximately the same as that expected for
Electric Boat’s lead ship, Virginia, at final acceptance. This is a tribute not just to the
men and women of Newport News, but to the entire Electric Boat – Newport News team.
Performance on Block 2, ships five through ten, has been influenced by a healthy
infusion of the benefits of the teaming arrangement and the wisdom of the structure
created in 1997. As we study the data we are seeing on these ships and look at the trends
they represent, we have every reason to expect that with our ongoing initiatives Newport
News can complete its work on these ships on budget. We are currently on budget for
ship 5, the lead boat of Block 2, and are driving efficiencies to achieve similar results on
the remaining ships. This is the industry commitment that is essential to make the CNO’s
30-year Shipbuilding Plan a reality. Can I quantify all of the actions today that will
guarantee such an outcome? No. These ships deliver between 2009 and 2014,
construction hasn’t even begun on some, and all require continued ship-over-ship
learning, but the goal of “on budget” performance is the reason we believe it essential to
continue working with our teaming partner, with the submarine industrial base, and with
the Navy to identify opportunities that we each control to lower cost. Newport News is
committed to doing this and we will continue to work collaboratively toward that goal.
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Block 3, the next block of ships to be put under contract, will derive the full benefit of the
teaming structure, learning that has taken place, process and facility improvements that
have occurred, and volume production. If the current positive trends continue for
shipbuilding costs, the government successfully executes its plans to reduce the cost of
government furnished equipment, and we increase the rate of submarine production to
two ships per year under a multi-year procurement with economic order quantity (EOQ)
purchases, I am confident that block 3 submarines can be delivered to the Navy in
accordance with the plan of “2 boats for $4 billion” in 2005 dollars. I am also confident
that the teaming agreement and its unique equal sharing of work and profit is the best
way for the shipbuilders to achieve this cost goal.
Stability is Key
Shipbuilding has suffered for too long from the lack of a coherent, agreed-upon, Navy
shipbuilding plan. At the end of the Cold War, the Berlin Wall fell and took with it the
national consensus on how big a fleet America needed to ensure its national security. As
the nation has struggled to re-define its global responsibilities in a new era, the Navy’s
long-range shipbuilding plans have become more notional than real. The shipbuilding
industry is highly specialized. Because it is capital intensive, shipbuilders must be able to
plan ahead if they are going to find investors willing to fund the facility modernization
and maintenance requirements they have.
Shipyard labor forces are also very specialized. One does not become a qualified
shipbuilder overnight. Throughout the shipbuilding industry, it is generally recognized
that five years of training and experience are necessary before a new employee is truly
proficient. Nuclear skills require additional training and a variety of certifications which
must be earned and re-validated periodically. Developing these skills requires
investments by shipyards in formal training and certification programs, on-the-job
training programs, mentorship programs and additional supervision for newer employees.
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Beyond specific skills, there is a culture within a nuclear shipyard that must become
second nature to all nuclear-qualified employees. Nuclear work is driven by carefully
documented procedures that must be followed to the letter for the safety of employees
and to ensure the product which is ultimately delivered will perform as it is supposed to
without issue. Nuclear-qualified employees must also learn to adapt a questioning
attitude. If an employee does not think that his work is proceeding as it is supposed to,
the employee has learned to stop immediately and call the issue to the attention of a
supervisor, much as some assembly lines can be stopped by an employee who detects a
quality or process issue. The consequences of nuclear-qualified employees not asking
questions all the time can be significant either in the construction process or later when
the ship is at sea. These cultural factors require time to absorb, close supervision and
greater investment by the shipyards.
When shipbuilding plans are not stable, shipyards risk hiring too many employees and
investing in their training only to find the anticipated need for these employees evaporate.
At that point, these employees must be moved to other work, if there is any, or let go.
When the shipbuilding plan changes again and employees are needed again, shipyards
have to try to re-hire employees they previously trained or hire new employees and start
all over again. This is, at best, uneconomical and can lead to shipyards not having
enough employees with the right skills and certifications when they are needed.
The enunciation of a coherent 30-year shipbuilding plan by the Chief of Naval
Operations in recent months has come as a welcome relief to a long stretch of instability
and uncertainty for our industry. While there are areas of the plan where some of us
might prefer alteration, Admiral Mullen’s clear declarations that he intends to stick with
his plan and that he will make every effort to fund it appropriately are important steps in
the right direction. I applaud the CNO’s effort to work to a plan that is based on sound
military judgments about future threats to our security.
As a shipbuilder and a citizen, I hope that the Congress will also support the CNO’s plan
with the funding needed to build these ships. This must be a long-term commitment
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which is supported by the American people and will, perhaps, require special funding
mechanisms to mitigate the spikes which come in years when large capital ships are
procured.
Volume is Essential for Cost Reduction
While stability is critical to maintaining a vibrant shipbuilding industry, we cannot lose
sight of the fact that the costs of producing a series of ships will come down in a
meaningful way only when there is sufficient volume flowing through the shipyards.
Even in the absence of volume, the Electric Boat – Newport News team has worked hard
at reducing costs and the success of these efforts is beginning to be seen, particularly with
Block 2 ships. But performance and innovation alone are not enough. Nor is volume
alone enough. It takes the combination of volume with good performance, innovation,
process improvements and investment to successfully reduce costs.
The reality of the situation, in my view, is that reaching and sustaining a cost of Virginiaclass submarines at $2 billion in 2005 dollars requires an increase in production rates and
the increase needs to come as soon as possible. As a shipbuilder focused on nuclear
submarines and aircraft carriers, I know that I may be a bit parochial as I look at my ship
programs in isolation. I have no doubt other shipbuilders do the same with their
programs. Balancing national priorities is a responsibility best left to those who serve the
nation in the civilian and military leadership of the Navy and the Department of Defense
and the Congress. Disrupting a plan sometimes brings with it unintended consequences
that we must all be wary of. We have experienced this at Newport News as two one-year
delays in the start of production of the CVN 21 have added over $1 billion to that
program. More specifically to the submarine program, the Electric Boat – Newport News
team was originally supposed to begin producing two submarines per year in 2002; that
date is now 2012. There is no question that this change has added significant cost to the
submarine program.
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I pledge to continue to work with the Navy and the Congress to provide all the
information they need to make these difficult decisions on how to balance competing
priorities. At the same time, I know that we will achieve the CNO’s goal of reducing the
costs of the Virginia-class submarine most quickly by going to a production rate of two
submarines per year as soon as possible.
Shipbuilders and Navy officials know that the cost of Navy ships has three components:
shipbuilder labor, shipbuilder material and government costs which include government
material and support agency costs. Currently on the Virginia-class shipbuilder labor
accounts for about forty percent of the total cost; shipbuilder material accounts for
twenty-five percent; and government material and support accounts for about the
remaining third. As shipbuilders we have been taking steps to reduce our labor and
material costs, but attention must be given to all three components. The Navy must
continue to take steps to stabilize requirements, minimize unnecessary design changes
after production begins, and reduce the cost of government furnished equipment and the
support provided by Navy laboratories and other Navy agencies.
There is ample evidence from previous classes of submarines and other serial ship
production that when production goes into series, labor costs are reduced. Our history
with the production of Los Angeles-class submarines in the 1990’s demonstrated a steady
decline in man-hours required to build the ships when shipbuilders had the opportunity to
find more efficient ways to accomplish similar tasks from ship to ship and were able to
sustain steady movement down a learning curve.
We are seeing a similar pattern in the Virginia-class program. Both shipyards are
currently seeing labor man-hour reductions as both yards move beyond their initial
submarines and, especially, perform work on Block 2. When volume is increased, there
will be an even greater positive impact on shipyard labor costs.
We also know from our experience with the Los Angeles-class that there are risks
inherent with design changes and major insertions of new technologies, other than those
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intended to simplify production and reduce costs. Recognizing that these changes will
affect costs, careful consideration needs to be given to balancing the cost of technology
insertion with the benefits of the new capabilities. When such insertions are determined
to be necessary or beneficial, the Virginia-class can be the vehicle to maintain critical
submarine design skills on a real platform that will get the product to sea. This is key to
ensuring the robustness of the design change and is a good measure of whether critical
design skills are being maintained. Nonetheless, too many large design changes will add
cost to the program.
Increasing volume will also have an important impact on material purchases. When
shipbuilders are able to buy required construction material and components from
subcontractors in volume, savings are achieved. This is one of the great benefits of being
authorized and funded to procure material in advance of construction. Just as
shipbuilders can achieve learning curve savings with volume production, suppliers are
better able to manage their workforces, maintain continuity in production, maintain
critical skills, and achieve un-interrupted learning curve efficiencies. As production rates
increase, the shipyards use economic order quantity purchases to aggressively negotiate
with vendors and to achieve the lowest price on these materials.
Delivering Results
We have seen the benefits of the current multi-year contract with economic order
quantities in Block 2. To date the Electric Boat – Newport News team has achieved a
target set by the Navy to save $240 million on material purchases for ships six through
ten. The Navy intends to achieve savings of $160 million on government furnished
equipment for a total of $400 million in savings. In addition, the shipyards have found
$23 million in savings on 35 key material items above and beyond the target of $240
million. We can reasonably expect that similar results will be achieved as the program
hits its stride with greater volume.
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Before concluding I want to return to the labor picture for a few final comments. In the
Los Angeles-class submarine program in the 1990’s, once the program reached optimal
production levels with stable build plans and technology insertion issues behind it, labor
costs were decreased with each successive ship. In the Virginia-class program, Virginia
and Texas have borne the brunt of early design changes. As changes were made on
Virginia, they were passed to Texas which was following closely behind. These design
changes had a significant impact on the labor costs. We believe that the design is now
locked down and the team can capitalize on standardization to achieve cost savings.
Both shipyards are seeing a twenty percent reduction in labor man-hours on recurring
costs from their first delivered ship to their second. From Virginia to Hawaii, Electric
Boat is on track for a twenty percent reduction in labor. From Texas to North Carolina,
Newport News is also on track for a twenty percent reduction in labor. The ability to
achieve such reductions is even more astonishing given the significant impact of very low
production rates of Seawolf at Electric Boat and the fact that there was no submarine
construction at Newport News for the previous ten years. Both yards are seeing evidence
that the trends are moving in the right direction – downward. Continued adherence to the
tenets of the teaming agreement coupled with an increase in production rates will help
this program be as successful as the Los Angeles-class program.
Conclusion
The Virginia-Class Submarine is going to be an invaluable asset to the Navy throughout
the century. By the end of this year, the Electric Boat-Newport News team will have
delivered the first two submarines to the fleet. Good progress is being made by the team
on the remaining ships of Blocks 1 and 2 and the ground work is being laid for an even
more successful and cost-effective Block 3 in the near future.
We have been able to get to this point in the program because of the investment made by
the American people in the specialized facilities and skilled employees at both Electric
Boat and Newport News.
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I am optimistic about the future because we have, at long last, a shipbuilding plan from
the Navy and one that the Navy leadership has pledged to support and fund. Stability is a
necessary condition for successful shipbuilding, but stability alone will not drive down
the cost of producing these technological marvels. Volume is also essential if we are to
further drive down the cost of producing these submarines.
History is clear in the shipbuilding industry as well as other manufacturing industries that
the cost of production falls when there is serial production. We must get there – soon. In
the absence of volume, our team will continue to take out cost everywhere we can. We
are not sitting idly by waiting for serial production to begin before we try to reduce costs.
We have been attacking them from day one of the program and we will continue to attack
them until the final ships sail from our shipyards to their new homes at Naval bases. The
shipbuilding team is actively engaged in this battle just as the Navy’s program office is
working to reduce the government component of the total cost.
With the continued support of the Congress, in the not too distant future we will all look
back on this teaming arrangement and acknowledge that together we have made an
important difference in safeguarding our national security.
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